Tandem Energy Holdings (fka TDYH)

[Jagman]

Some thoughts on energy:

The Season Is the Reason for Energy Patience

"Pick Your Spots
Again, there is a possibility energy stocks will take a pause as we near Labor Day. Commodity demand will slow seasonally in September and October and there isn't likely to be a lot of market-moving news between now and mid-September. Combined with the fact that stocks typically don't follow the "straight-line-up" pattern, it shouldn't be a surprise if energy names moderate a bit.
So while I remain constructive on the group, the next several weeks should provide opportunities for those who are patient, follow their discipline and use planned entry points to build positions. Investors that step in over time should see energy help power their portfolio higher."


By Christopher Edmonds
RealMoney.com Contributor
8/18/2005 8:27 AM EDT

This column was originally published on RealMoney on Aug. 17 at 10:32 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
With Labor Day in reach and the summer heat soon to end, it's easy to argue that energy prices are sure to moderate. With this seasonal adjustment in crude oil and natural gas prices almost a sure thing, some investors are concerned that energy stocks are likely to follow. Moreover, given the recent run in energy equities, some argue the fall could be hard.

I agree with the seasonal expectation, but disagree that it will be a hard fall. Any breather isn't likely to break the back of the positive longer-term tone of the energy markets.

A quick review of the fundamentals provides plenty of evidence to suggest energy will remain a place to invest in the months to come and well into 2006.

A Rigged Market
For those wondering about the challenges facing North American natural gas production, consider this:
In the past year, the number of rigs drilling for natural gas has nearly doubled.
In that same time period, year-over-year production has remained almost flat.
Some might argue that seems nearly impossible, but it seems more realistic when you note the nearly 30% decline rate from existing wells. In addition, many of those rigs have been added over the course of a year, and there is little doubt that over the course of the coming year more production will be added. However, with the decline rate continuing to accelerate, it isn't likely that a large step-up in natural gas production will materialize.

That means there will be increased demand for drilling rigs. Given that nearly every rig available to drill is drilling today, day rates for rigs should continue to increase. And with only modest cost creep for contract drillers (labor is the largest challenge), day-rate increases will largely drop to the bottom line, boosting profits.

Regular readers of this column know that I think Nabors Industries (NBR:Amex - commentary - research - Cramer's Take) is the elite among drillers. Not only does Nabors have solid exposure to natural gas drilling in the U.S., the company is the only domestic, land-focused driller with meaningful exposure to international markets. Plus, Nabors continues to grow its presence in Canada, where rigs are nearly as tight as in the U.S.

For those seeking smaller companies, a look at Pioneer Drilling (PDC:NYSE - commentary - research - Cramer's Take) and Grey Wolf (GW:Amex - commentary - research - Cramer's Take) makes sense. Both of these companies faced challenges as the cycle bottomed and turned but both have done a solid job of putting rigs back to work and pushing prices higher as demand accelerates.

All three companies are bringing older, cold-stacked rigs out of mothballs, refurbishing them and putting them back to work, as well as considering the construction of new rigs to meet growing demand. Regardless of rebuild or newbuild, rig capital equipment purchases will continue to benefit National Oilwell Varco (NOV:NYSE - commentary - research - Cramer's Take).

Again, readers will recognize this name, as National Oilwell commands over 50% of the global rig capital equipment market. With $1.2 billion in order backlog and growing, this company is a solid mid- to late-cycle play in the energy sector.

Under Pressure
One other area to watch among energy service companies is the stimulation and pressure pumping business. Like rigs, the demand for fracturing -- the process by which flow is stimulated in tight production formations -- jobs has also accelerated.
As a result, companies that provide stimulation services will also benefit from better pricing power and demand. The multidimensional service companies like Halliburton (HAL:NYSE - commentary - research - Cramer's Take), Schlumberger (SLB:NYSE - commentary - research - Cramer's Take) and Baker Hughes (BHI:NYSE - commentary - research - Cramer's Take) will benefit, as will the more focused pressure pumping companies like BJ Services (BJS:NYSE - commentary - research - Cramer's Take).

While not for the faint of heart due to a new management team and a full-blown internal audit and restatement (both of which should be good for the company when the audit is complete), patient investors with an understanding of the risks involved in such a turnaround may benefit by looking at Key Energy Services (KEGS:NYSE - commentary - research - Cramer's Take). CEO Richard Alerio has turned companies around before and, in the process, created solid value for shareholders.

Pick Your Spots
Again, there is a possibility energy stocks will take a pause as we near Labor Day. Commodity demand will slow seasonally in September and October and there isn't likely to be a lot of market-moving news between now and mid-September. Combined with the fact that stocks typically don't follow the "straight-line-up" pattern, it shouldn't be a surprise if energy names moderate a bit.
So while I remain constructive on the group, the next several weeks should provide opportunities for those who are patient, follow their discipline and use planned entry points to build positions. Investors that step in over time should see energy help power their portfolio higher.






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